[Viewpoint] The dark side of G-20 responsibilityOn the flight back to Seoul from the third G-20 summit meeting in Pittsburgh, Blue House officials exclaimed three cheers. They weren’t alone. The entire country was in a celebratory mood.
I, however, was frightened by the phrase “resolving global imbalance” in the G-20 agreement. Historically, whenever the phrase prevailed, it has always been followed by dreadful catastrophe. It has always been the powerful that hold a sword by the hilt, and it is always the weak that bleed. Because of that traumatic history, the cheer on the flight from Pittsburgh sounded ominous.
In 1927, the presidents of the three major European central banks simultaneously called for the resolution of global imbalance. They were aiming at the emerging new power, the United States. The United States was enjoying enormous gains from trade with Europe and was raking up European gold with abandon, resulting in a serious imbalance.
The entire European continent was experiencing a serious sense of crisis as it was desperate to maintain the gold standard. In the spring of 1927, the governor of the Bank of England Montagu Norman, German Central Bank president Hjalmar Schacht and deputy governor of the Banque de France Charles Rist made a pilgrimage to the United States. The three economic big shots urged the United States to lower interest rates and boost domestic demand. The U.S. Federal Reserve had no choice but to lower the rediscount rate and released money. The outcome was the Great Depression two years later.
Once again, the resolution of global imbalance was the topic of the Plaza Accord on Sept. 22, 1985. Burdened by the twin deficits, the United States worked together with Europe to pressure Japan to depreciate the U.S. dollar to the Japanese yen. Of course, the diplomatic document of the Plaza Accord does not include any such harsh expressions.
However, it said “exchange rates should play a role in adjusting external imbalances” and “orderly appreciation of the main non-dollar currencies against the dollar.” The two phrases brought tremendous shock. After a three-day weekend, the yen to dollar exchange rate fell from 235 yen by nearly 10 percent in the Tokyo market. One year later, the exchange rate dropped to 150 yen to one U.S. dollar. We all know that the devaluation of the yen led to the burst of Japan’s economic bubble and the lost decade.
U.S. Treasury Secretary Timothy Geithner defines the resolution of global imbalance with an objective to design a sustainable and balanced global economic structure that relies less on debt. The theory is flawlessly idealistic. But the problem is the will to find a balance at whatever cost. In order to bring balance back to the global economy, a surgical operation to reconstruct the bones and muscles will be necessary.
Historically, the process of resolving global imbalance always begins with a shocking price adjustment. Likewise, this time we still won’t be able to avoid a war of exchange rates.
It is a textbook case to open fire on trade friction with pre-emptive moves. And I have an ominous feeling that a series of actions by the United States seem to be following the well-worn scenario of the past. Last week, Federal Reserve Chairman Ben Bernanke sent a warning to export-driven Asian countries.
For the first time since 1985, the Office of the United States Trade Representative announced that it was hunting for trade rule breakers among trade partners with large surpluses against the United States.
Unless we find another planet, the global economic growth rate is meant to decrease. We can no longer maintain the structure of consumption by the United States and funding by Asia. The buzzword of “international cooperation” is not too reliable. It would be mad not to help one another in the global crisis, but we will end up even worse off if we depend on international cooperation.
The United States was hit hard in 1925, and Japan was blown away in 1985. The situation is not likely to improve now. It is more realistic to assume that countries will wage a war of exchange rates and trade over the shrunken global market while advocating international cooperation.
It is a true accomplishment to host the G-20 summit meeting next year. However, we should not be so complacent with our “elevated national status.”
Instead, leading the G-20 meeting and overcoming the economic crisis could turn into an obstacle for the Korean economy at any time. Managing Director of the International Monetary Fund Dominuque Strauss-Kahn said that the economic crisis was not over, and when one crisis is settled, another crisis will follow.
As stated in the G-20 agreement, resolution of global imbalance is an unavoidable trend and is only a matter of time and extent. Heavily dependent on exports, the Korean economy is on a roller-coaster ride. Now is no time to cheer or celebrate.
*The writer is an editorial writer of the JoongAng Ilbo.
by Lee Cheol-ho